I had a chance to hear Robert Shiller give a lunchtime lecture today and thought I’d post here since his topic is one that EJ routinely hits on – inequality in the American economy.

In particular, Shiller spoke on a proposed solution to the growing inequality in the American economy and produced “Lorenze Curves” for the period 1979-current, which showed the degree to which income has been redistributed upward in the last 25 years.

There were a couple basic premises that underpinned his research and his presentation. First, he considers the growing inequality in the US our “most important economic question” and that “economic growth depends on fairness.” Second, that some level of inequality is healthy and should be permanently maintained.

He touched in passing on the historical results of gross inequality and the way that populist remedies often serve to reduce wealth for everyone in the process of reducing inequality. I think he'll need to make this point much more tangibly before people who might "lose" under his proposal are willing to think about it seriously (see below).

In a nutshell Shiller proposes that we index inequality by tweaking tax rates over time to ensure that, for example, the bottom 20% of income is earned by a constant percentage of taxpayers. He suggested that we use today as a baseline. In other words, if 50% of taxpayers currently earn 20% of income, the goal would be to lock that in by managing tax rates.

He suggested that in addition to ensuring that our society does not become (even more?) grossly unfair, this sort of indexing would create a shared sense of purpose and encourage popular acceptance of “growth policies” (since a rising tide would actually lift all boats).

Note that Shiller acknowledged that there were a lot of details that had yet to be worked out or that couldn't be addressed within the time constraints today. So consider this a general concept only.

My own impressions…

As long as the wealthy in this country believe they can capture an ever-increasing portion of new wealth they’ll never allow this sort of thing to pass. Had we passed legislation like that Shiller’s proposing in 1979, here’s what tax rates (inclusive of all taxes) would have looked like in 2002:

Earners of the top four sextiles of US income: 70% tax rate (~40% of HH)
Earners of the fifth sextile: 55% tax rate (~20% of HH)
Earners of the bottom sextile: 0% tax rate (~40% of HH)

The percentage of households (HH) paying each rate could be off since I was just eyeballing the chart from a distance, but I thought this was interesting since it gives you some idea just how much wealth would have to be redistributed to recreate the distribution as it existed in 1979.

At any rate…given the sample tax rates above, I don’t believe there’s any chance something like this will pass or even be taken seriously unless the people with power and money in the US are confronted with far grimmer alternatives. And while those alternatives may well be in the offing the people whose support would be needed for this kind of reform don’t see them coming.